Should finance ministry start handling public debt?

NEW DELHI: For quite some time, the policy advisers in the country have been debating handling of public debt, with one question being who should do that.

The objective is to have a holistic view of the entire public debt, internal and external, so that its cost can be kept as low as possible. The matter has now reached a juncture, demanding a decisive policy intervention.

According to the high-powered expert committee (HPEC) on making Mumbai an international financial centre (IFC), an open capital account is an inevitable requirement for creating such a centre in this century. The committee noted that the task of managing monetary policy in a rapidly growing developing economy with an open capital account would be more complicated than now.

Given that aiming high growth is a given in the present Indian context, which functions as a monetary-cum-regulatory authority, would need to be divested of its "subsidiary functions" to enable it to focus exclusively on the single task of managing a key short-term base rate to maintain price stability.

In other words, the monetary authority ought not to be required to manage multiple conflicts of interest. Because such a situation would expose it to the risk of taking sub-optimal decisions on the base rate, which is its core function as central banker.

One of the major supposedly non-core functions which RBI performs at present is public debt management. HPEC is of the view that an either independent autonomous agency or the finance ministry could manage public debt. Divesting the monetary authority (RBI) of this job would help avoid any perception of conflicts of interest in its affairs in the eyes of regulated financial firms, a prerequisite for an IFC to be.

The idea is not entirely new. A September 2004 report of a task force on 'Ministry of finance in the 21 st century" had said more or less the same. Noting that implementation of the key tasks of treasury management is presently dispersed across a host of agencies— RBI which handles issuance of domestic debt, the finance ministry's various units which handle external debt, the central accounts section which tracks contingent liabilities—the task force had suggested an institutional mechanism for organising public debt management.

A new agency, National Treasury Management Agency (NATMA) could be set up. At present, since various agencies share the job, there is an inherent lack of an integral view of the full portfolio of public debt, the task force had cautioned. The task force and HPEC clearly concur with each other as the former, too, had stressed that RBI's function of issuance of domestic debt could circumscribe its freedom in managing the monetary situation.

Also, the central bank's interest in debt management could undermine the verity and certitude with which it ought to perform other functions such as regulating banks and being a systems operator for securities market infrastructure. Most developed countries in the world, including the US, the UK, Germany and Canada, manage their public debt through their finance ministries.

Australia has an autonomous entity for the job. In recent years, emerging economies like China and Brazil have shifted public debt handling to their respective finance ministries or treasuries. How should NATMA be equipped to perform effectively?

The task force had said in terms of autonomy and accountability, its stature could be akin to RBI, Sebi or CBDT. Indeed, it should have access to exchanges, clearing corporations, etc., for intelligence and be permitted to trade in spot and derivatives markets. Obviously, NATMA would require high quality human capital, even though it could have a compact staff size.

Sub-optimal handling of public debt is expensive in myriad ways. It's a fairly acknowledged fact that one of the impediments in the development of a robust bond market in the country is that the central bank is hamstrung by a diversity of goals.

Absence of a clear view and vision of the public debt portfolio necessitated inefficient, ad hoc reactions. Even some momentous measures in this regard in recent years such as buyback of illiquid government bonds, pre-payment of expensive foreign debt and restructuring of state government loans came as ad hoc reactions rather than as prompt initiatives that should have come naturally from a well-oiled machinery.

In fact, quite a few universally employed tools for handling public debt have never been used in India: no strategising for the medium and long-term; optimal portfolio of government debt in terms of currency composition and maturity are not being computed in a continuous fashion; no system to gauge and manage day-to-day risk exposure like liquidity, market and credit risks.

Clearly, an omnibus policy prescription is needed and a headstrong public debt regulator needs to assume its position. Concomitantly, RBI would do its job of managing monetary policy more freely.